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Is This How It All Begins to Unravel?
By Chris at www.CapitalistExploits.at
My daughter found a sick baby bird in our garage a few weeks ago. We took it in and began nursing it back to life. My daughter, a gentle little soul who believes that our home should be turned into an animal shelter for every imaginable creature whether it needs help or not, was interested in the species of bird we were looking after.
This led us meandering down the ornithology path. After we'd identified our patient as a house sparrow, we continued looking at other birds. What we found was a particular species of bird which I immediately recognized as a bird which should be the mascot for sovereign debt.
Fulmar chicks, like many small birds, are very cute looking. They look completely harmless. You can imagine cuddling one, taking it home to your partner and being rewarded with all manner of affection for being so thoughtful, "Oh dear, she's beautiful. What a lovely gift."
The fulmar, however, has a little secret. This cute looking chick sprays puke all over anything which comes too close. This is a defense mechanism designed to ward off enemies. When you come too close to it, this seemingly innocent little ball of fluff will projectile vomit a type of rotten fish smelling oil all over you. Apparently it's incredibly difficult to get the vile smell off your skin even after using a wire brush in the shower. What a little bastard of a bird!
If you so happened to be a predatory bird you're really screwed. The fulmar's "gut oil puke" acts like a form of unbelievably strong super glue, gluing your feathers together and making flight impossible. Should you decide to head into the water to rid yourself of this death vomit, the sticky vomit apparently causes you to lose your buoyancy and you drown!
Murderous puke! And yet the bird looks harmless...
Similarly, investors lulled into a false sense of security caused by linear assumptions, have loaded up on sovereign debt, believing mistakenly that they've got themselves a safe asset. It is the equivalent of a harmless sparrow. Something that can't possibly harm you. Boy, will they find a surprise when they open the shopping bag and realise what they've actually taken home. A vile stinking destructive package of crap, disguised as a safe investment. Risk free, they're calling it.
Not long ago I showed how debt has risen since the 2008 crisis. In fact, today we have this unique situation where in Europe we're staring at 700-year lows in interest rates.
Surely, with interest rates so low we'd expect to find a field of daffodils on the risk side. Declining yields on bonds would normally be attributed to lower risk of default. Stands to reason, but reason cannot be found today in the sovereign debt markets. Instead, we find that risk is off the charts.
The yield on the 10-year German bond stands at mere 0.27% today
When I stare through my murky windscreen the road ahead looks uncannily like the end of the great debt cycle. This is not the normal 7-year business cycle we're dealing with here and it makes timing all the more difficult. As tough as it is in calling the end of a long term debt cycle, why would anyone without the benefit of mind altering drugs take the tail risk of long duration sovereign debt for such paltry returns?
Fed set to raise rates in June
This is largely what the clowns at the Fed have been telegraphing to the world. Investing is not about "knowing" what will happen. Nobody knows what will happen. It is about probability, and furthermore about managing risk relative to probability.
I'm going to go out on a limb here and say that if the Fed does indeed raise rates in June we're going to begin to see periphery sovereigns default. The probability isn't what matters so much as the price we have to pay in order to position ourselves to take advantage of that probability.
Pray tell, what happens to European debt relative to US debt?
My guess is that investors in European sovereign debt will puke as they realise that they've brought home the equivalent of a fulmar, instead of a soft cuddly barn swallow which couldn't do them any damage.
Bonds cannot defy gravity forever. While interest rates are low all over the developed world, a significant divergence in relative yield may well be the proverbial straw which breaks the camels back.
Two years ago I wrote about how a market needs only change at the margin. At the time I was discussing shorting the yen which we'd been short since 77 to the dollar. At the time it was just punching through 94 and Abe was just about to bring his padawan Kuroda onboard. It takes more than one meathead to do a decent job.
In that post I mentioned how the more levered a market, the less resistance there is towards a change in direction.This is why it's possible for major changes to take place at the margin. When everybody thinks one way, who else is left to come to the party? The sovereign bond markets today sport these characteristics, and I worry that the results may turn out poorly. Perhaps really poorly especially for those holding European and emerging market sovereign debt.
The impact on the carry trade
Should the Fed raise rates in June, the impact on the carry trade will only be exacerbated.
We've spoken at length about the carry trade, both in our detailed USD Bull Market report as well as my explanation of the anatomy of a carry trade bubble. It's important to understand how interconnected world markets are. Nothing happens in isolation.
Consider investors, hedge fund managers, pension funds, and other financial flotsam and jetsam will now have added incentive to pay back borrowed dollars after their forays into emerging market debt and high yield instruments. Not only has the yield differential moved against them as dollar returns on a yield basis outperform. Equally importantly, this itself will simply fuel demand for the already strengthening greenback.
A rate rise by the Fed will act as a margin call on carry trade assets as the yield differential widens in favour, this time of the dollar. This is why I fully expect some hair raising events in the 3rd and 4th quarters of 2015 as levered players who are currently coughing up blood actually die. It promises to be a good show.
I should point out that a strengthening dollar is deflationary on a global scale. I struggle to see how this is anything but bearish for commodities and commodity currencies.
As terribly managed as the dollar is, we believe that global capital flows increasingly favour the USD. This will likely have the perverse effect of sending the wrong signals to US policy makers who understand global capital flows in the same way my young daughter understands quantum physics - not so much.
This dollar rally and periphery debt default we're expecting will set the stage for the Fed to eventually attempt to reverse the strong dollar, bringing about a rise in US bond yields and a loss of faith in the mighty dollar. We have more of the show to enjoy though before we get there.
- Chris
"We are experiencing very demanding times." - Jean-Claude Trichet
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The Fed will not raise rates until after the crash. They will not raise rates which would cause the crash.
except they raised rates last time in order to crash housing
Sort of off topic, but the House Sparrow the OP's daughter wanted to save is actually a nasty little invasive creature that completely annihilates native songbirds by pecking them and their offspring to death in the spring. Yet another cuddly little bird :)
"I'm one of the most sensitive human beings on Earth - and I know it." - Jean-Claude Van Damme
Bird puke will be the least of the worries. think blood on the streets, lamp posts w/ nooses and guillotines man
I believe that since 2008 we have been living through a period reminiscent of the 10/15 years prior to the depression of 1929.
- During this period there were a myriad of panics, bank runs and failures.
- It resulted in vast expansion of government in the US.
- it also culminated in WWII.
- It also depending on the source resulted in the death of 65-80 million people worldwide.
- it saw the end of old and the beginning of new hegemonic empires.
As Mark Twain had said history doesn't repeat but it does rhyme.
I think that everyone realizes that something is coming and I think that it will materialize soon. To me this explains the lack of action on anyone in governments part. It explains the bankruptcy of amorality in government and business leaders, and institutions and organizations.
It explains the fear of the wealthy over the masses coming for them and their establishing hidden and protected redoubts and modern day fortresses. It explains mass surveillance and the government buying huge volumes of ammunition.
There will be a collapse in my opinion and research I feel this year I believe so. I do not have crystal ball just my opinion.
Think taking everyone's gold in 1933 was bad? this time it will be everyone's pensions.
You don't militarize your police, get rid of Posse Comitatus, Habeas Corpus, give the FCC power over free speech. because your afraid some people in caves.
You don't label returning Vets and constitutionalists more dangerous than ISIS
http://teapartyorg.ning.com/video/dhs-terrorist-warning-returning-vets-c...
https://info.publicintelligence.net/USArmy-InternmentResettlement.pdf
I agree, I think that they will seize or attempt to. They are planning and preparing for a major event I am not sure what that will be but something will finally shake the average American from their docile slumber.
I think that their preparations will be of little help, I do not have faith in the average person to effect change. However I am certain that those people who exist at the fringes of society (a cake is most easily diminished from the edges) will act in their own interest which will likely be the spark to the average Joe/ Joann to act these things generally take on a life of their own once the first person actsand when the slide does start it will be violent, catastrophic, unstoppable and final.
It begins, http://www.washingtonpost.com/blogs/federal-eye/wp/2015/03/13/treasury-again-tapping-tsp-federal-retirement-fund-for-debt-ceiling-relief/
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Fed set to raise rates in June
This is largely what the clowns at the Fed have been telegraphing to the world.
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It is, but it is most unlikely to happen.
At the first sign of trouble (which will be _before_ rates are raised), Yellen will back off, and will make public announcements to that effect.
BTW, the article's main tenet is that the trouble will be from _periphery sovereigns default_.
IMHO the problems will be much closer to home (which is why Yellen will react so rapidly).
To be honest, I'm not sure how rates in the US (or mostly everywhere, actually) can _ever_ be raised.
Nobody will want to be accused in future history of being the person who pricked the final, biggest bubble.
Though, of course, bubbles always burst...even if not pricked first.
Watson
I mean, it's going to get embarassing as QE, the only apparent choice left for the Fed, continues, and investors are left wondering why their stocks are still going up but the company that issued them is out of business.
What is confusing them is why such massive amounts of QE still cause deflation and a surging dollar........history is doomed to repeat itself once more I'm afraid.
Sounds like the Fulmar is the mascot of Zion.
They weight you down and keep your from flying, and if you try to swim, you drown.
The banksters need to repay us.
The more important pedal to master in a vehicle is the brake , not the accelerator. The maleveolent pieces of crap that own the Federal Reserve System are afraid even to tap the brake let alone step on it. Why ? They do NOT know how to use it is my guess - thus they are afraid of the consequences if they do hit the brakes.
They know how to use the brake.
But they are only dimly aware of all the consequences of using it.
The brake analogy isn't that good...if everyone uses their brake, everyone stops, which might be inconvenient/inefficient, but nothing really bad happens.
If the Fed raises rates all sorts of bad things happen...
Watson
Another way to view the situation is to imagine the Fed knows exactly how bad things are and struggles to keep the system alive. After all it will be pretty bad when it finally fails.
Assuming this one should then try to figure out their next move. How does raising rates help?
I do not see it so I think they won't, but I did not think they would end QE either. If they do not raise rates it just keeps the markets under control by the mere threat. If they do raise rates it could cause a large market drop and that might be their needed excuse to resume QE.
At fofo's blog there is a commpn quote that goes like this: "My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"
Ultimately we see hyperinflation of the now deflating dollar. No country can tolerate a rapidly rising currency, not when the ability to cheapen it by printing more is easy (and fun). The end may come too fast for all the usual events to play out but that is the end game that seems to be rapidly approaching.
That reminds me of Newman's fate in Jurassic Park.
"Murderous pukes"
...perfect
Will writers ever run out of metaphors for the enormous pile of manure we're in?
No, because we have the best of the best out there working on it: PhD's. (Piled higher and deeper).
Margin call on peripheral borrowers. You're all gonna get screwed. Unless, you have an alternative to the dollar, that is. Like maybe some other international payment exchange facility and some bric supported bank. Otherwise you're gonna pay us segniorage foevah!
The ONLY way for things to work is for the FED or Government is to make an investment vehicle where the dept is paid on a flat rate instead of interest.
When those Central and South American countries begin to default the US will invade and confiscate material wealth of the citizens to repay the debt. It won't look like an invasion, and there may not be a single shot fired, but we will insuate ourselves into their economies and politics to collect what is owed to us.
When will enough people decide that the social and economic problems the world is facing are actually caused by the US and that we are not the solution and begin to resist?
The Fed CANNOT raise rates.
DavidC
"The Fed CANNOT raise rates."
No. It. Can. Not.
So. It. Will. Not.
Until. It. Is. Way. Too. Late.
"But this ship CAN'T sink!"
https://www.youtube.com/watch?v=qoTirOwta4w
Oh sure they can. Just as they're getting on the plane...
Pretty much.
The Fed follows the 3 month T-Bill Rate and has been since our data shows - back to 1995
http://bullandbearmash.com/about/us-prime-rate/
So, the Fed isn't in comfortable control of interest rates after all? Oh, my!
That "control" was completely relinquished under Greenspan's watch. Before that it was knee jerk reactions back to Nixon's (puppet) decoupling from gold.
"I should point out that a strengthening dollar is deflationary on a global scale. I struggle to see how this is anything but bearish for commodities and commodity currencies."
The best way to weaken the dollar is more QE. e will NOT see a rate increase in June. We will see an extensin of ZIRP and a propaganda buildup to another round of QE. You have pointed out the dangers of a rate increase, and no-one not even Yellen, is stupid enough to do it.
No one is stupid enough to not know the consequences of raising rates.
And, if someone wants to speed the destruction of the U.S., say an Obamunist, then there no better way.
Probably the day after the 2016 Election Day.
I disagree, ther iare plenty of stupid people! Just last night I was arguing with a guy (a bank auditor) he is absolutly convinced that things are rosey and that the rate will be increased. I told him if they do it will be Goodnight Irene.
Once again, I over-estimate the intelligence of humanity.
When will I learn?
A bank auditor? (laugh track deafening)
So easy a cave woman could do it!
It's BEEN unraveling since the beginning! TPTB just didn't know it.
Situation critical. Liars sinking into the shit storm they created.
Fiat paper bitches!!
Wait....?